This month, the main drivers of the foreign exchange market have been official developments rather than macroeconomic factors that often shape investors' decisions.

In addition to Russia/Ukraine and China developments, it was the ECB's failure to take more measures to address the tightening of financial conditions, and falling inflation, that finally managed to convincingly push the euro above the $1.38 area that had capped it since last October.

It was also comments by Draghi on March 13 that have thus far put the euro's high in just below $1.3970. This past week, it was a seemingly more hawkish Federal Reserve than expected, with the help of the new chair stripping the veneer of the traditional strategic ambiguity of language ("considerable period" = around six months), that was the chief spur to the dollar's recovery.

Perhaps these factors make the technical condition of the market an even more important source of insight than may usually be the case. We turn first to the dollar index, which many look at for a rough proxy for the U.S. dollar, even though it is far too euro-centric. The Yellen-inspired rally saw the dollar index retrace, almost to the tick, half of what it had lost since the year's high was recorded on January 21 near 81.40.

However, in order to signal more than the proverbial "dead cat" bounce, it needs to establish a foothold above 81.60, even though the 5-day moving average is poised to cross above the 20-day in early in the week ahead. Alternatively, on the downside, a break of 79.60-80 would suggest a new leg down has begun.

The positive technical tone of the euro has not been broken, even though it fell to nearly $1.3750 and closed below its 20-day moving average for the first time in over a month. It finished the week just in the 5-cent 5-month trading range ($1.33-$1.38). It found good bids below $1.38. To truly weaken the technical picture, the euro has to take out the $1.3680-$1.3700 area. The new trading range seems to be $1.3750-$1.4000, and since the bottom end of the range was last tested, the rule of alternation implies risk to the upside.

The price action in the dollar-yen is uninspiring. It remains, as it has since the beginning of February, in a relatively narrow trading range. The ¥101.20 area marks the lower end, while the upper end is around ¥102.80. The range was extended in early March to almost ¥103.75 but was not sustained. Three-month implied volatility fell to new lows since late-2012 before the weekend, suggesting that continued range trading is likely.

With the April 1 retail sales tax nearly at hand, Japanese economic data is largely immaterial. Until the impact of the tax is clearer, the monetary and fiscal policies are on hold. Most expect additional BoJ measures in Q3 around the time the government could decide on a supplemental budget and whether to postpone the second step increase in the retail sales tax.

Sterling peaked on February 17 and was trading at its lowest level since February 12 before the weekend. The 5-day moving average crossed below the 20-day on March 12. It has approached a key retracement objective near $1.6470. This will be an important area in the coming sessions. A convincing break may give it the momentum to cut through the 100-day average which is near $1.6425 and target the $1.6300-50 area. However, we are more inclined to see sterling's recent downdraft as primarily a technical correction and start of a bear trend.

The $0.9140 target we suggested for the Australian dollar last week, assuming the $0.9100 level was breached, held. The price action warns that a sideways trend rather than an uptrend is more likely. If the $0.9140 area is on the top, then $0.9085 is on the downside. A break of this range likely points to the direction of the next half cent move or so.

While the Australian and New Zealand dollars compete with each other for the strongest major currency this month, the Canadian dollar has been competing with sterling for the weakest. Year-to-date, there is no competition. The Canadian dollar has fallen about 5.3% against the US dollar. Sterling, the second weakest currency, so far this year, is off by 0.4%.

The market thought Bank of Canada Governor Poloz's reluctance to rule out a rate cut actually makes it more likely. It doesn't. While Poloz's comments were sufficient to arrest the Canadian dollar's advance, it took the FOMC and Yellen to push it down. In particular, the US dollar rose convincingly above CAD1.12, which it had tried several times this year to do and failed.

Better than expected retail sales and a CPI reading not as soft as the market feared saw the Canadian dollar bounce, but the US dollar helped support in the CAD1.1170 area. This area needs to be taken out to signal anything important.

The US dollar remains range-bound against the Mexican peso. If the proximate range is MXN13.15 to MXN13.35, the greenback is near the middle of the range. The technical indicators are not generating strong signals. The disappointing economic data and dovish central bank make us more inclined to buy the dollar as it approaches the lower end of the range.

Observations from the speculative positioning in the CME currency futures:

1. The pace of position adjustment picked up over the course of the reporting period that ended on March 18. The general pattern was to add to gross longs and cut gross short foreign currency positions. The Canadian dollar was the only currency futures that we track here that saw an increase in gross shorts. Sterling was the only one that saw a gross longs pared.

2. There were three adjustments that we regard as substantial, which we define as a gross adjustment of 10k contracts or more. The short gross yen positions were culled by nearly 30k contracts to 85.2k. It is the biggest short covering since July 2012. It underscores our argument that the yen's safe haven appeal is more about short covering that fleeing to Japan. Gross short Canadian dollar positions jumped 20k contracts to 97.6k. It is the largest jump in shorts since last December. This was before the FOMC meeting that saw the Canadian dollar sell-off to new multi-year lows. The gross long Australian dollar positions more than doubled to 21.6k contracts, reflecting a 13k increase, bolstered perhaps by ideas the next move for the Reserve Bank of Australia is a hike.

3. The 53.0k net long euro contracts is the most since last November. The 61.1k net short yen contracts is the smallest since last October. The net long Swiss franc futures position of 15.1k contracts is the largest since June 2011. The 24.5k net short Australian dollar contracts is the smallest since last November.

4. The short-term speculative market was ill-prepared for the unexpected hawkishness of the Federal Reserve the day after the reporting period ended. Some who were stopped out may be part of the bargain hunting seen before the weekend, such as in the euro and Australian dollar.